By Philip Chang
In recent years, antitrust prosecutors have shifted their focus to the technology industry. Antitrust litigation and attempts to regulate monopolistic corporate practices have existed since the late 1800s. The Sherman Act, the first antitrust law passed in 1890, was considered a “comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade.” In 1914, Congress passed two more antitrust laws: the Federal Trade Commission Act (which later resulted in the creation of the FTC) and the Clayton Act. To this day, these three laws exist to provide the fundamental guidelines for antitrust laws, which gives courts great discretion to declare mergers and business practices unlawful. Antitrust laws function as a regulatory scheme protecting competition—focusing on ensuring businesses maintain incentives to operate efficiently.
Antitrust laws do not exist to punish large-scale corporations for their success, but to protect the process of competition itself. In short, antitrust laws attempt to prevent formation of monopolies within any industry, instead advocating for a more competitive sector encouraging competition and growth. Modern antitrust laws and litigation have shifted their regulatory lens towards different industries, particularly in the technology space, including the video game industry. Recently, companies like Microsoft and Sony, both at the helm of the console video game industry, have been key targets of antitrust claims for their business practices. This article will examine the history of antitrust laws, their purposes, how they function, and their impact on the video game industry.
Monopoly power in any one industry has adverse effects. In particular, a monopoly can inflict societal harm by decreasing output, increasing prices, and stalemating innovation in an industry. A monopolization occurs when one entity dominates the market in a particular industry or business. There are three primary federal antitrust laws that seek to prevent monopolies: the Sherman Act Section 1, Sherman Act Section 2, and the Clayton Act. The Sherman Act Section 1 defines the specific anticompetitive conduct, while Section 2 focuses on the consequences of behavior that may be deemed anticompetitive. For this examination, an understanding of the Clayton Act is key as it regulates the mergers or acquisitions of companies in unison with joint guidelines published by the Federal Trade Commission (FTC) and Department of Justice (DOJ).
Most recently, the climate of the video game industry has been dominated by the acquisition of developers by large corporations, such as Sony and Microsoft, that own and manufacture the most popular consoles. For example, Microsoft’s $68.7 billion acquisition of developer Activision Blizzard is the largest merger in the history of the gaming industry. Commentators have discussed the timing of the deal, which occurred during a period in which “Big Tech is under greater antitrust scrutiny than before, and when competition authorities are flexing their muscles to demonstrate a loss of patience with the sector.” This acquisition has effectively made Microsoft the third-largest video game publisher in the world. Many similar acquisitions in the technology sector whereby a dominating market force has acquired smaller corporations have resulted in increased efforts by the FTC and DOJ to broaden the scope of antitrust laws. As of early 2022, both governmental entities seek to refine and update their horizontal merger guidelines—announcing that they are actively seeking public input on how to better modernize the enforcement of antitrust laws concerning mergers. Ultimately, such developments hold significant weight because they are a sign that antitrust in the technology industry is only going to become a more prevalent issue, resulting in more antitrust-related work at larger law firms.
The Clayton Act
The Clayton Antitrust Act of 1914, codified at 15 U.S.C. 12-27, which outlaws the following: (1) price discrimination; (2) conditioning sales on exclusive dealing; (3) mergers and acquisitions when they may substantially reduce competition; and (4) serving on the board of directors for two competing companies. The Clayton Act came to fruition in the early 20th century with the purpose of weakening the power of trusts and monopolies when many large corporations began engaging in anti-competitive mergers, predatory pricing, and exclusive dealing. Such actions served inimical to the interests of the nation as a whole and, in particular, local businesses. At the time, Representative Robert Crosser cautioned that Congress’ “failure to check the growth of monopolies will result in industrial slavery.” The Clayton Act effectively strengthened the existing provisions of the earlier Sherman Act, which had largely fallen short in regulating large corporations.
In 2021, U.S. Senator Amy Klobuchar, chair of the Senate Judiciary Committee’s antitrust subcommittee, proposed the Competition and Antitrust Law Enforcement Reform Act. The bill’s main purpose is to amend the existing Clayton Act to make anticompetitive mergers in the technology industry more difficult. Proponents of the Reform Act argue for its necessity, citing weakening federal enforcement and judicial decisions that have resulted in a looser interpretation of the Clayton Act. As a result, large technology corporations have gained monopolistic influence in their industries. At its core, the revision seeks to enable regulators “to prohibit mergers that would have potential anticompetitive effects, such as reduced choice, reduced innovation, the exclusion of competitors, or increased barriers” for smaller companies. The bill proposes a new risk-based standard that broadens the definition of a merger that has an “appreciable risk of materially lessening competition.” Primarily, the Reform Act seeks to increase the standard for “material” to mean anything greater than a trivial amount, which replaces the current standard established by the Clayton Act, which bars mergers that show a “substantial” reduction in competition.
Big Tech and Antitrust
Antitrust concerns have proliferated in the technology space partly because anti-competitive behavior has risen to prominence in the legislature. The current landscape of antitrust can best be attributed to the fact that “Big Tech” companies (i.e., Facebook, Amazon, and Google) faceng credible threats to their status as industry leaders. Moreover, these companies have been impacted by antitrust in one way or another—by lawsuits, state and federal legislation, international action, and also public sentiment shifting towards an attitude of distrust. Lawmakers have proposed a variety of bills aimed at enforcing and expanding antitrust laws. Their efforts against Big Tech are supported by the DOJ’s Antitrust Division and the FTC, which led by outspoken critics against Big Tech’s monopolies in the technology sector such as [prominent name or two?].
Antitrust litigation against technology companies is not a new concept by any means. In 1998, the U.S. government brought an antitrust lawsuit against Microsoft, accusing it of maintaining a monopoly on the PC market through its specific technological practices. The lawsuit alleged Microsoft engaged in anticompetitive behavior by restricting users from uninstalling Internet Explorer. The District Court ruled Microsoft’s practices constituted a monopoly, violating multiple sections of the Sherman Antitrust Act. Subsequently, it ordered Microsoft split into two entities—one responsible for producing operating systems with the other producing software. More recently, the FTC filed a federal antitrust case against Facebook, alleging it “resorted to an illegal buy-or-bury scheme to maintain its dominance.” In other words, the FTC is alleging Facebook unlawfully acquired potential rivals. Such actions are what the Clayton Act sought to prevent at its inception. Similarly, Google has been the subject of the DOJ’s antitrust division for the mere fact it effectively has a monopoly over internet search engines.Google owns that monopoly not because of efforts to absorb competitors like Facebook but because the company is publicly viewed as the first choice amongst search engines. Ultimately, this leads to further debate as to whether antitrust laws should punish companies for their product’s dominance. The video game industry faces a shift more akin to Facebook’s competition acquisition model.
Antitrust in the Acquisitions of Video Game Developers
The global video game market was valued at $173.70 billion in 2021 and is expected to reach $314.40 billion by 2027. The industry’s popularity skyrocketed as a byproduct of worldwide lockdowns imposed by the COVID-19 pandemic, with more people finding ways to occupy time at home. Nintendo alone saw an increase of over 500% in net profits after the release of Animal Crossing: New Horizons in 2020. Even before the pandemic, the video game industry saw an upward trend because of the increasing popularity in streaming, e-sports, and ease of access. In the last three years, the gaming industry has seen an increase of half a billion players.The market has a variety of offerings ranging from consoles to mobile gaming and PC games. The current landscape should, in theory, suggest no one company has a monopoly over video games. Yet corporations are seeing an increase in antitrust litigation over their acquisition of video game developers and the distribution models themselves.
Console gaming is dominated by Sony’s PlayStation and Microsoft’s Xbox. The console wars have raged in the past decade, and many predict a consolidation war between Sony and Microsoft is coming. Microsoft’s all-cash acquisition of Activision, awaiting regulatory approval expected in 2023, was followed closely by an announcement from Sony that they were acquiring Bungie Studios, a renowned developer, for $3.6 billion. Both transactions, at the forefront of the gaming industry, pose questions of whether the FTC or DOJ will scrutinize such acquisitions attempts to dominate an ecosystem. In any case, such acquisitions have become more common in the gaming industry; Microsoft also acquired ZeniMax Media in 2021 for $7.5 billion—the deal finalized after receiving regulatory approval from the European Union. In retrospect, Sony’s acquisition of Bungie seems miniscule in comparison to Microsoft’s recent, historic deals. This has many wondering whether the FTC will analyze such acquisitions under the same level of scrutiny for anti-competitive behaviors that it will with Microsoft’s purchases.
Increased antitrust scrutiny “impacts video game M&A in two respects: its impact on the acquisition and its impact on the way in which the target company does business.” Corporations seeking to acquire developers and distributors, with their legal teams, will need to consider whether a transaction could be subject to merger control from the federal government. Acquisitions in the video game industry will require buying corporations to notify requisite authorities “where the relevant thresholds (usually based on local revenues and/or market share) are met, regardless of whether there is any overlap between the buyer and the target.” The notification requirement is one reason Activision’s acquisition of King Digital Entertainment required notification to the European Commission.
Antitrust in the Distribution Model
As alluded to above, the video game industry is likely to see a radical shift with more corporations trying to capitalize on the economic success that video game developers can bring through acquisition. Microsoft’s acquisition of Activision makes way for the developer to develop Microsoft-only games, along the lines of console-exclusive series like Uncharted and Halo. The consolidation wars are likely to be defined, at least in part, by whether the acquisitions of developers are lawful. However, that is not to suggest antitrust enforcement in the video game industry has not yet occurred or only affects console gaming. Mobile gaming is also a critical component of the video game industry that has seen a spike in antitrust related concerns—particularly in regard to the notion that some corporations have monopolistic control over pricing.
A recent high profile antitrust case in mobile video gaming was Apple’s lost point in Epic Games Inc. v. Apple Inc, in which Judge Yvonne Gonzales Rogers enjoined Apple from prohibiting developers “from providing links or other communications that direct users away from Apple-in app purchasing.” This lawsuit exemplifies how antitrust litigation can impact virtual marketplaces, such as the video game industry. Many mobile app developers, like Epic Games, are relying on antitrust laws to challenge arguably anticompetitive policies of companies, such as Apple which has strict rules requiring software developers to exclusively utilize its own in-app payment system “which takes between 15% to 30% of each transaction.” Epic Games’ most popular series, Fortnite, which is free to download, is massively profitable because it charges money for “V-bucks,” an in-game currency allowing players to make cosmetic purchases for their characters. Under the current rules, which Judge Rogers reaffirmed, Apple takes a cut of each Epic Games generated transaction. To address this, Epic wanted to install its own application store within Apple’s app store—bypassing Apple’s stream of payment and argued it could do so because Apple had monopolistic control over the app store. Judge Rogers concluded Apple was not a monopolist and c “success is not illegal.” Epic Games v. Apple highlights how antitrust issues in the video game industry can present beyond more typical mergers and acquisitions creating an unfair marketplace.
The distribution model, in which developers such as Epic Games make their living, is also the subject of antitrust concern in a different way. A current class-action lawsuit against Sony contests its distribution model for PlayStation titles. The lawsuit alleges Sony has a “monopoly over the sale of digital PlayStation games” because, prior to 2019, consumers could purchase video games through download codes sold by third-party retailers like Amazon, Target, and GameStop. However, that model shifted when Sony changed its distribution model so download codes could exclusively be purchased via the PlayStation Store, an online marketplace owned by Sony and available on its PlayStation console. Moreover, the lawsuit alleges Sony’s supposed monopoly allows it to determine “supracompetitive prices for digital PlayStation games, which are significantly higher than their physical counterparts sold in a competitive retail market, and significantly higher than they would be in a competitive retail market for digital games.”
Many consider Sony’s control over its distribution model an unlawful monopoly restricting the fundamental ideas of free-market competition and allowing Sony to price gouge on PlayStation titles. Its exclusive distribution of digital PlayStation games only demonstrates antitrust in the video game industry seeps into different facets. The first and most obvious form of antitrust concerns in the video game industry is through the acquisition of developers by large corporations like Microsoft and Sony, which are in the midst of the “consolidation wars” after a decades-long fight in the “console wars.” Second, companies seek to gain further control over the distribution of video games themselves like Sony did with its PlayStation marketplace, which brings about its own slew of antitrust lawsuits.
However, the class action lawsuit against Sony over its digital sales model highlights an emerging concern that corporations are on a path towards monopolizing the distribution of video games themselves—at the expense of third-party retailers and consumers who are forced to purchase exclusively from the corporations. The shifts in video game distribution raise many questions about the future enforcement of antitrust laws in the video game industry.
In sum, video games have become a multibillion-dollar industry in the last twenty years and corporations are capitalizing on this market by focusing on two aspects: (1) acquisition; and (2) distribution. Inherently, the methods by which corporations acquire and distribute video games create antitrust concerns, particularly a fear that these companies may monopolize the industry itself. For example, the lawsuit against Sony alleges that consumer must pay 175% more for games due to the exclusive marketplace it has created for PlayStation titles. At its core, activity permitting such control to lie within one party which results in such a massive price increase violates the principles of antitrust laws and thus causes more scrutiny.
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